Slide 4
The Manager
• A manager is a person who directs resources to
achieve a stated goal. This definition includes all
individuals who:
1. Direct the efforts of others, including those who
delegate tasks within an organization such as a
firm, a family, or a club.
2. Purchase inputs to be used in the production of
goods and services.
3. Are in charge of making other decisions, such as
product price or quality.
Slide 5
Economics
• Economics is the science of making decisions in
the presence of scarce resources.
• Resources are simply anything used to produce a
good or service to achieve a goal.
• Decisions are important because scarcity implies
that by making one choice, you give up another.
• Scarce resource facing by student is time.
Slide 6
Managerial Economics

Integrates and applies microeconomic
theory and methods to decision making
problems faced by private, public, and
not-for-profit organizations.

Managerial economics deals with
microeconomic reasoning on real world
problems such as pricing decisions
selecting the best strategy in different
competitive environments.

Slide 7
• Demand and Supply Analysis
and how to estimate price elasticities with regressions
• Production and Cost Analysis
and how managers can estimate these relationships
• Monopoly, Competition, and Oligopolies
and how to make good pricing decisions in the real world
• Organization Architecture
and the economic problem of motivating agents
• Risk in Economic Decisions
and ways to modify or compare risks

Slide 12
• To make good economic decisions,
managers need to be able to forecast &
estimate relationships
• Will be forecasting demand (both P
t
& Q
t
)
» applies to for-profit corporations
» non-profit organizations
• Hospital Administrators -- # patients
• University Administrator -- enrollment
• Regression analysis, time series
methods, and qualitative forecasting
methods used for forecasting
Slide 13
Identify Goals and Constraints
• Goals: maximizing profits or increasing market
share.
• Constraints: available technology, the prices of
inputs used in production.
• The goal of maximizing profits requires the
manager to decide the optimal price to charge for a
product, how much to produce, which technology
to use, how much of each input to use.
Slide 14
Economic vs Accounting Profits
• Accounting profit is the total amount of
money taken in from sales (total revenue, or
price times quantity sold) minus the cost of
producing goods or services.

Slide 15
The Role of Profits
• Economic Cost (or opportunity cost) is the
highest valued benefit that must be sacrificed
as a result of choosing an alternative.
• Economic Profit is the difference between
revenues and total economic cost (including
the economic or opportunity cost of owner
supplied resources such as time and capital.
• Opportunity cost includes both the explicit (or
accounting) cost and the implicit cost.
Slide 16
Implicit Cost
• Very hard to measure.
• Example: what does it cost you to read a
book? The price you paid for that book is
explicit (accounting) cost, while the implicit
cost is the value of what you are giving up
by reading that book.
Slide 17
Factors Affecting Stock Prices
Economic Environment Factors
1. Economic Activity
2. Tax Rates & Regulations
3. Competition
4. Laws and Governmental Regulation
5. Unionization
6. International Conditions & Exchange Rates
Major Policy Decisions Under Management Control
1. Products or Services Offered
2. Production Technology
3. Marketing and Distribution Network Used
4. Investment Strategies
5. Employment & Compensation Policies
6. Ownership Form
7. Capital Structure Used
8. Working Capital Management Policies
9. Dividend Policies
10. Alliances, mergers, spin-offs
Amount, Timing, and Risk of Expected Profits

Shareholder Wealth (The Market Price of the Stock)

Conditions in
Financial Markets
1. Interest Rates
2. Investor
Sentiment
3. Expected Inflation
(Figure 1.3)
Slide 18
Agency Problems
• Modern corporations allow managers to have
no, or limited, ownership participation in the
profitability of the firm.
• Shareholders may want profits, but managers
may wish to relax.
• The shareholders are principals, whereas the
managers are agents.
» Conflicting motivations between these
groups are called agency problems.
Slide 19
• The Principal-Agent Problem
»Shareholders (principals) want profit
»Managers (agents) want leisure &
security
Slide 20
Solutions to Agency Problems
• Compensation as incentive
• Extending to all workers stock options,
bonuses, and grants of stock
»It helps to make workers act more like
owners of firm
• Incentives to help the company,
because that improves the value of
stock options and bonuses.
Slide 21
Shareholder Wealth Maximization:
Necessary Conditions
• COMPLETE MARKETS - liquid markets
for firm's inputs and by-products (including polluting
by-products).
• NO SIGNIFICANT ASYMMETRIC
INFORMATION - buyers and sellers all
know the same things.
• KNOWN RECONTRACTING COSTS
future input costs are part of the present value of
expected cash flows.
Slide 22
Goals in the Public Sector and the
Not-For-Profit (NFP) Enterprise
 Public Goods are goods that can be consumed or used by
more than one person at the same time with no extra cost
(like a flood control or national defense).
 Sometimes governments produce public goods. Other times,
they are exclusive to one person (like a free meal).
 Instead of profit, NFP organizations may have as their goals:
1. Maximization of the quantity of output, subject to a
breakeven constraint.
2. Maximization of the utility (happiness) of NFP
administrators.
3. Maximization of cash flows.
4. Maximization of the utility of contributors to the NFP
organization.
Slide 23
• Which goal a NFP manager selects affects
decisions made.
» A food shelter manager may decide to maximize
the utility of contributors by selecting only
"healthy foods"
• Public sector managers are performance
monitored.
» V.A. hospital administrators are rewarded by reducing
the cost per bed over a year. Hence, they become
efficient with respect to costs.
» The "friendliness" of the hospital staff is harder to
measure, so friendliness will tend not be a high priority
of the public sector manager.
Slide 24
• Most decisions involve a gamble
• Probabilities can be known or unknown, and
outcomes can be known or unknown
• Risk -- exists when:
» Possible outcomes and probabilities are known
» Examples: Roulette Wheel or Dice
» We generally know the probabilities
» We generally know the payouts
Slide 25
Concepts of Risk
• When probabilities are known, we can analyze risk
using probability distributions
» Assign a probability to each state of nature, and be
exhaustive, so that E p
i
= 1
States of Nature
Strategy Recession Economic Boom
p = .30 p = .70